ETF Trends For 2016: Part 3, Management Fees

By | February 8, 2016

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In part 1 of this series, we reviewed the growth of the ETF market in 2015 and introduced the series by covering currency-hedged products. In part 2 , we took a look at robo-advisors, a well-covered topic that could have a huge impact on the way ETFs are utilized. In this final piece in the ETF Trends series, we will cover management fees and the competition it causes between issuers, and a conclusion on the potential for the ETF Industry in 2016. The ETF Fee War While some issuers are creating funds for specific market niches, other issuers are taking a different approach when looking to stand out in the sea of possible funds, as articulated by Crystal Kim for Barron’s : Early this November, BlackRock (NYSE: BLK ), the largest exchange-traded fund provider by assets, trimmed fees by two to three basis points (two to three one-hundredths of a percent) on seven iShares Core ETFs. The expense ratio of the iShares Core S&P Total U.S. Stock Market (NYSEARCA: ITOT ) was taken down to 0.03%, winning the crown for cheapest ETF on the market-briefly. That is, until Schwab (NYSE: SCHW ) matched it by lowering fees by one basis point on four large-cap ETFs. The Schwab U.S. Large Cap fund (NYSEARCA: SCHX ) now stands toe-to-toe with its counterpart at iShares, fee-wise. For every $10,000 invested, the rival funds cost a mere $3. That’s cheaper than a copy of Barron’s at the newsstand. There are pieces covering the ETF price war going back to 2010, so this is by no means a new discussion topic for ETF investors. However, price wars continue to play a role in the ETF investment scene as a way to attract retail investors. The Trefis Team lays this relationship out for us: The largest avenue of growth for ETF providers over the coming years is expected to be the retail investor market, which remains extremely under-served. As retail investors are much more sensitive to expense ratios, asset managers have been trying to attract them with a string of low-cost ETFs. The following image is another from the ICI 2015 Investment Company Fact Book, showing the growth in ETF AUM by retail investors. Assets in ETFs accounted for about 11% of total net assets managed by investment companies at year-end 2014 and net issuance of ETF shares reached a record $241 billion. Click to enlarge While there are a number of funds digging deep to keep costs low in an effort to attach larger clients, the average ETF expense ratio is still 0.44%. This is mainly due to the number of active and narrow-focused funds that can still afford to charge investors more, because they are the only ones currently available in the space. But as market saturation continues, being the only player may not be a given. This is great news for investors interested in these niche offerings but aren’t willing to foot the bill at this time. For reference, the average mutual fund expense ratio is 0.70% (down from 0.90% in 2000 before ETF competition started to take hold), so it is no small feat that ETFs are as cost effective as they are today. But as issuers continue to fight for retail investors in the coming year, we should expect to continue to see expense ratios slashed. This slashing is not just good news for institutions, but the individual issuers who get to enjoy cheaper management fees as well. Concluding Thoughts For 2016: ETFs Continue To Grow When asked about the ETF industry in early 2015, Amy Belew, Global Head of ETP Research at BlackRock stated : The global ETP (Exchange-Traded Product) industry continues to grow at a double digit pace as ETPs attract a broader base of global investors than ever before. ETPs are being used by capital market participants looking for deep liquidity, to investors seeking precision exposures, to a growing segment of the market using ETFs as buy and hold investment vehicles. We are forecasting global ETP assets to double to $6 trillion over the next five years. While future trends within the ETF industry are impossible to perfectly predict, I believe this an industry that will only continue to evolve and grow to meet investors’ needs in 2016. Scalper1 News

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